Several amendments to the Delaware General Corporation Law (“DGCL”) went into effect on August 1, 2014, most notably amendments to Section 251(h), the “statutory top-up” provision enacted last year. The amendments are designed to eliminate limitations on use of the statutory top-up, including by eliminating the “interested stockholder” prohibition. The changes should further encourage the use of tender offers in connection with acquisitions of public company targets. In addition, amendments to DGCL Section 242 will allow a board to amend a company’s Certificate of Incorporation without a stockholder vote to change the corporate name and to make certain technical changes...

October 2014
Third Quarter 2014
The Ropes Recap
Mergers & Acquisition Law News
A quarterly recap of mergers and acquisition law news from the M&A team at Ropes & Gray LLP.
Contents
Delaware Legislative Update .......................................................................................................... 3
Amendments to DGCL Effective August 1, 2014 .......................................................................3
News from the Courts ..................................................................................................................... 4
Additional Guidance on Kahn v. M&F Worldwide Corp. ...........................................................4
Exculpation Determined After Entire Fairness ............................................................................5
Court of Chancery Confirms Corporations Do Not Owe Fiduciary Duties to Stockholders
and Cannot Aid and Abet a Fiduciary Breach .............................................................................6
Court of Chancery Holds Failure to Include Management Presentations in Proxy Statement
Not a Breach of the Duty of Candor ............................................................................................7
Bylaws Need Not Select Delaware as Forum ..............................................................................8
Oregon Court Refuses to Enforce Delaware Exclusive Forum Selection Bylaw ........................8
Chancery Court Highlights Need for Clarity in Priority of Sources of Advancement and
Indemnification ..........................................................................................................................10
Rural Metro Damages Decision Results in Significant Liability for Financial Advisor ...........11
Federal Update .............................................................................................................................. 13
New Bill Aims to Expand CFIUS Review Process ...................................................................13
Cornerstone Report on Securities Litigation in H1 2014: Report Shows Decline in
Securities Class Action Litigation .............................................................................................14
New Regulations Likely to Slow “Inversion” Deal Activity .....................................................14
Notable Deals ................................................................................................................................ 17
Dollar General Rebuffed (Again), But the Fight Goes On ........................................................17
London Update.............................................................................................................................. 18
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The Small Business, Enterprise and Employment Bill Would Increase the Ability to
Identify Those Who Own and Control UK-Registered Companies ..........................................18
Asia Update ................................................................................................................................... 20
Administrative Controls Relaxed for Outbound Investments by Chinese Enterprises ..............20
Contributors .................................................................................................................................. 21
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Delaware Legislative Update
Amendments to DGCL Effective August 1, 2014
Several amendments to the Delaware General Corporation Law (“DGCL”) went into effect on
August 1, 2014, most notably amendments to Section 251(h), the “statutory top-up” provision
enacted last year. The amendments are designed to eliminate limitations on use of the statutory
top-up, including by eliminating the “interested stockholder” prohibition. The changes should
further encourage the use of tender offers in connection with acquisitions of public company
targets. In addition, amendments to DGCL Section 242 will allow a board to amend a
company’s Certificate of Incorporation without a stockholder vote to change the corporate name
and to make certain technical changes:
• Elimination of the “Interested Stockholder” Prohibition. As originally drafted, Section
251(h) was only available under circumstances in which a transaction did not involve a
person who was an “interested stockholder,” as such term is defined in DGCL Section
203, at the time the target’s board of directors approved the merger agreement. Many
practitioners interpreted this provision to preclude use of Section 251(h) under
circumstances in which a 15% or more stockholder executed a tender and voting
agreement in support of a proposed transaction. As amended, the “interested stockholder”
restriction has been deleted from Section 251(h) altogether, thus expanding the
availability of the provision.
• Clarification of “Any and All” Shares Requirement. Formerly, Section 251(h) required
that tender offers be for “any and all” of the target’s voting stock. This requirement has
been modified to exclude target stock owned at the commencement of the offer by the
acquirer, the target, and certain affiliates of such parties. Moreover, the amendment
provides practitioners with additional flexibility with respect to the treatment of such
stock in connection with the back-end merger. The practical effect of these changes
should be to make the rollover of equity more straightforward in the tender offer context.
• “Guaranteed Delivery” Is No Longer Sufficient. As amended, Section 251(h) now
provides that shares of stock tendered into an offer are not counted for purposes of
determining whether the tender condition is satisfied unless irrevocably accepted for
exchange and received by the depositary before the expiration of the offer (i.e., shares
promised to be delivered pursuant to guaranteed delivery procedures can no longer be
counted).
• Section 251(h) “Opt-In” No Longer Exclusive. The amendments clarify that while
Section 251(h) requires the parties to a merger agreement to explicitly elect to be subject
to that provision, such election need not be preclusive to other back-end closing
mechanics. As amended, parties to a transaction may now expressly “permit” the use of
Section 251(h), while allowing for the potential abandonment of the mechanism in favor
of consummation of the transaction under a different statutory provision.
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• Amendments to Certificates of Incorporation without Stockholder Approval under 242.
DGCL Section 242 has been amended to authorize a corporation to amend its certificate
of incorporation without stockholder approval (unless otherwise expressly required by the
certificate of incorporation) to (1) change the corporate name, (2) delete historical
provisions in the original charter naming the incorporator, the initial board of directors
and/or the original subscribers for shares and (3) delete provisions relating to already
effected changes in capital stock.
News from the Courts
Additional Guidance on Kahn v. M&F Worldwide Corp.
In Swomley v. Schlecht, a recent transcript ruling by the Delaware Court of Chancery, Vice
Chancellor Laster provided additional guidance on the application of Kahn v. M&F Worldwide
Corp., a decision discussed in the April 2014 edition of the Recap.
In Kahn v. M&F Worldwide Corp., the Delaware Supreme Court affirmed the Delaware Court of
Chancery’s decision to apply the deferential business judgment rule, rather than the more
exacting “entire fairness standard,” to review transactions involving a controlling shareholder.
Business judgment rule review was made available provided the deal is conditioned at the outset
on both (i) the approval of an independent, adequately-empowered and well-functioning special
committee and (ii) the uncoerced, informed vote of a majority of minority stockholders. The
Delaware Supreme Court permitted this more deferential approach to reviewing squeeze-out
transactions if and only if (i) the controlling stockholder conditions the transaction on the
approval of both a special committee and a majority of minority stockholders, (ii) the special
committee is independent, (iii) the special committee is empowered to freely select its own
advisors and say no definitively, (iv) the special committee fulfills its duty of care in negotiating
a fair price, (v) the vote of the minority stockholders is properly informed and (vi) there is no
coercion of the minority stockholders.
Kahn v. M&F Worldwide Corp. was welcomed by many practitioners as a way to reduce the
leverage plaintiffs held to extract settlements of lawsuits challenging deals, given the time and
cost required to defend cases under the “entire fairness” standard. But the decision left open
questions regarding whether and how defendants could avail themselves of its protective
framework at the pleading stage, using the framework to win dismissal of cases before discovery,
particularly in the face of allegations of an inadequate purchase price.
In Swomley v. Schlecht, Vice Chancellor Laster provided helpful clarification. Granting a motion
to dismiss, the Vice Chancellor held that plaintiffs are required to plead sufficient facts to call
into question whether the six factors in the Kahn v. M&F Worldwide Corp. framework were met,
rather than just to allege that they were not. Vice Chancellor Laster noted that “… the whole
point of encouraging the [Kahn v. M&F Worldwide Corp.] structure was to create a situation
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where defendants could effectively structure a transaction so that they could obtain a pleading-
stage dismissal against breach of fiduciary duty claims”. In order to survive a motion to dismiss
under the Kahn v. M&F Worldwide Corp. framework, he observed, a plaintiff “would have the
burden [of] … pleading facts that would undermine each of its elements”. Separately, Vice
Chancellor Laster noted that whether a company is private or public should have no bearing on
whether the Kahn v. M&F Worldwide Corp. framework applies.
Although only a transcript ruling, Swomley v. Schlecht has significance as one of the first
decisions to apply Kahn v. M&F Worldwide Corp., and will likely further encourage use of the
Kahn v. M&F Worldwide Corp. framework in squeeze-out transactions where feasible.
Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch. Aug. 27, 2014)
Exculpation Determined After Entire Fairness
Under Section 102(b)(7) of the Delaware General Corporation Law, a company may adopt a
bylaw provision exculpating breaches of a director’s duty of care. Many do. Such exculpation
provisions often aid in winning dismissal of claims and cases that involve challenges to a board’s
decision-making process in connection with a transaction. Arguments under Section 102(b)(7)
have long been used by defendants in cases under the business judgment rule. A recent
Chancery Court case, In re Cornerstone Therapeutics Inc. Stockholder Litigation, will offer the
Delaware Supreme Court an opportunity to discuss the application of Section 102(b)(7) to
transactions involving a controlling stockholder that are subject to the stringent review of the
“entire fairness” standard.
In a memorandum opinion dated September 9, 2014, Vice Chancellor Glasscock held that a
determination of whether a director defendant is exculpated from paying monetary damages for
breach of the duty of care can be made only after the question of entire fairness is resolved at
trial. In other words, an exculpation provision cannot be used to defeat a claim at the motion to
dismiss stage, even where a director is otherwise disinterested and independent.
The transaction at issue involved a sale process where a 65% controlling stockholder sought to
acquire the remaining outstanding equity interests in a company. A special committee was
formed, but approval of the transaction was not made contingent on the approval of a majority of
the minority stockholders, making review under the business judgment rule (per Kahn v. M&F
Worldwide Corp., discussed above) unavailable. The transaction was eventually approved by
more than 80% of minority stockholders, but the court held that a decision as to director
exculpation cannot be made until after the question of entire fairness is resolved at trial.
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On September 26, 2014, the defendant directors moved for leave to appeal the decision, which
was granted by the Delaware Court of Chancery and certified to the Supreme Court of the State
of Delaware for further disposition. The court’s decision will likely provide further guidance. In
the interim, the risk of full entire fairness review prior to the availability of exculpation will
likely further encourage the use of the protective framework for controlling stockholder
transactions that was set out in Kahn v. M&F Worldwide Corp.
In re Cornerstone Therapeutics Inc. Stockholder Litigation, C.A. No. 8922-VCG (Del Ch. Sept.
9, 2014)
Court of Chancery Confirms Corporations Do Not Owe Fiduciary
Duties to Stockholders and Cannot Aid and Abet a Fiduciary Breach
On August 7, 2014, in Buttonwood Tree Value Partners, L.P. v. R.L. Polk & Co., Inc., the
Delaware Court of Chancery dismissed stockholder claims against a Delaware corporation on the
grounds that a corporation itself (as distinct from its directors and officers) owes no fiduciary
duties to its stockholders, and that the corporation itself cannot aid and abet a fiduciary breach by
its own directors and management.
The plaintiffs, Buttonwood Tree Value Partners, L.P. and Mitchell Partners, L.P., were
stockholders in the defendant corporation, R.L. Polk & Co. (“R.L. Polk”), an auto parts
manufacturer that was largely owned and operated by the Polk family. In 2011, R.L. Polk
offered to purchase a limited number of its outstanding shares for $810 per share through a self-
tender. R.L. Polk made certain representations to stockholders in connection with the self-tender,
including that there were no plans for a merger transaction or for a material change to its
indebtedness. Buttonwood Tree Value Partners, L.P., tendered its shares in connection with the
self-tender for $810 per share, and Mitchell Partners, L.P., sold its shares for $811 per share to a
third party before the close of the self-tender.
The next year, in 2012, R.L. Polk began exploring strategic alternatives, and in June 2013 the
company announced that it had agreed to merge with HIS, Inc., for over $1.34 billion, or $2,675
per share. The plaintiffs sued R.L. Polk & Co., alleging that the company itself, through its
directors and officers, deliberately undervalued the company at the time of the self-tender in
order to benefit themselves in the subsequent merger transaction, and failed to disclose facts that
would have alerted tendering stockholders to that under-valuation.
R.L. Polk moved to dismiss the complaint for failure to state a claim, and the Delaware Court of
Chancery granted the motion. The court made clear that “a corporation does not owe fiduciary
duties to its stockholders,” and so cannot be sued for breach of those duties. The court did,
however, distinguish fiduciary duties from other duties that a company might owe to its
stockholders, including duties to disclose information (such as might be imposed, for example,
by federal securities law). The court left open the possibility that plaintiffs could proceed against
the company on a fraud theory.
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The court further held that “a corporation cannot aid and abet violations by the fiduciaries who
serve it” because “a corporation acts through its directors.”
Buttonwood Tree Value Partners, L.P. v. R.L. Polk & Co., Inc., C.A. No. 9250-VCG (Del. Ch.
Aug. 7, 2014) (Glasscock, V.C.)).
Court of Chancery Holds Failure to Include Management
Presentations in Proxy Statement Not a Breach of the Duty of Candor
In Dent v. Ramtron, Vice Chancellor Parsons dismissed a claim that a target company’s board
breached its duty of candor by failing to disclose to stockholders internal management
projections that the target company’s financial advisor relied upon in valuing the company. The
case follows in a long line from the Court of Chancery’s 2007 decision in In Re Netsmart
Technologies, Inc. Shareholders Litigation, which focused plaintiffs’ attention on management
projections in making claims of inadequate disclosures. Dent further shows that claims seeking
disclosure of certain projections will require Plaintiffs to allege, in a fact-intensive way, why the
particular information sought is important to a stockholder’s decision-making process and would
alter the overall mix of available information.
Ramtron International Corporation (“Ramtron”) received an unsolicited offer from Cypress
Semiconductor Corporation (“Cypress”) in the spring of 2011 to purchase Ramtron for $3.01 per
share (a 27% premium at the time). The board rebuffed Cypress’ initial offer as inadequate, and
no further advances were made by Cypress for over a year. Cypress showed renewed interest in
the summer of 2012, offering to buy Ramtron for a reduced price, and threatening to conduct a
hostile acquisition if the two companies failed to agree to terms. Ramtron eventually agreed to a
sale at $3.10 per share. With support from the Ramtron board of directors, Cypress acquired 78%
of Ramtron’s shares via tender offer. Unable to complete the transaction via short-form merger,
Cypress proceeded with a long-form merger and scheduled a stockholder vote to approve the
transaction.
The definitive proxy statement contained a summary of four financial analyses performed by
Needham & Company, including a discounted cash flow (“DCF”) analysis, which was prepared
based on management’s projections. Although the projections were relied upon by Needham in
preparing its DCF analysis, they were not disclosed in the proxy. Ramtron stockholders approved
the merger in November of 2012.
The court first noted that there is no per se duty under Delaware law to disclose management
projections relied upon by financial advisors in preparing their analysis because the question of
materiality is context-specific.
The court also distinguished the case from Netsmart. Unlike that case, the Ramtron stockholders
did not have to weigh the costs and benefits of selling their shares versus maintaining their
holdings in a going concern. Cypress had already acquired a majority of interest in Ramtron,
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guaranteeing a vote approving the merger. The only real decision before the stockholders was
whether to accept the merger consideration or seek appraisal.
The court focused on plaintiffs’ failure to plead how disclosure of management’s projections
would significantly alter the total mix of information available to Ramtron’s stockholders. The
proxy statement disclosed Needham’s DCF analysis as well as the fact that such analysis was
based on Ramtron management’s projections. A reasonable stockholder could have determined
from the information disclosed in the proxy statement that the transaction consideration paid by
Cypress was lower than Ramtron’s estimate of its future earning potential.
Dent v. Ramtron, C.A. No. 7950 VCP (Del. Ch. June 30, 2014).
Bylaws Need Not Select Delaware as Forum
On September 8, 2014, in City of Providence v. First Citizen Bancshares, Inc., the Delaware
Court of Chancery held that a forum selection bylaw selecting the courts of North Carolina as a
forum was facially valid as a matter of law. Writing for the court, Chancellor Andre Bouchard
noted that the forum selection bylaw at issue was virtually identical to the ones the court found to
be facially valid by then-Chancellor Strine in Boilermakers Local 154 Retirement Fund v.
Chevron Corporation except that it selected a forum other than Delaware. Applying the
reasoning of Chevron, Chancellor Bouchard noted that forum selection bylaws are “statutorily
and contractually valid under Delaware law,” with no requirement that a Delaware corporation
select Delaware as a forum. First Citizens had selected North Carolina because the bank has its
headquarters there. This decision appears to broaden the options for boards considering forum-
selection bylaws, particularly where a company would prefer to litigate internal corporate
matters in the courts of the state where it is headquartered, but subject to Delaware law.
City of Providence et al v. First Citizens Bancshares, Inc. et al, C.A. No. 9795-CB (Del Ch. Sept.
8, 2014).
Oregon Court Refuses to Enforce Delaware Exclusive Forum Selection Bylaw
A recent decision in Oregon, however, demonstrates the risk that non-Delaware jurisdictions
may decline to enforce a Delaware forum selection bylaw, in particular where that bylaw was
adopted after the stockholder plaintiff filed suit or under other circumstances that may be viewed
by a court (rightly or wrongly) as an attempt to “insulate” a board from litigation related to a
transaction. The case, Roberts v. TriQuint Semiconductor, Inc., was brought in Oregon Circuit
Court, challenging a merger between TriQuint Semiconductor, Inc. (“TriQuint”) and RF Micro
Devices, Inc. (“RFMD”). Defendants filed a motion to dismiss, which was denied, seeking to
enforce a Delaware forum selection bylaw adopted at the same time the board approved the
merger.
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On February 24, 2014, TriQuint and RFMD announced that they had entered into a merger of
equals. At the meeting at which the TriQuint board of directors approved the merger, the board
also adopted a Delaware exclusive forum selection bylaw. Notwithstanding that bylaw, certain
stockholder plaintiffs filed suit in Oregon, where TriQuint is headquartered, to enjoin the
transaction. Other stockholder plaintiffs filed a parallel Delaware action. Confronting multi-
jurisdictional deal litigation, TriQuint moved to dismiss the Oregon action based on its forum
selection bylaw.
An Oregon state circuit court rejected TriQuint’s motion to dismiss and refused to enforce
TriQuint’s exclusive forum selection bylaw. In so doing, the court relied heavily on the 2011
Galaviz v. Berg decision from the United States District Court for the Northern District of
California. Galaviz invalidated a Delaware exclusive forum selection bylaw implemented by
Oracle after certain stockholder plaintiffs filed a derivative action, holding that contract
principles precluded enforcement because the bylaw was enacted after the alleged wrongdoing
occurred and was enacted unilaterally by directors who were defendants in the derivative action.
The Oregon court’s decision to follow Galaviz is at odds with other decisions from California,
Illinois, Louisiana, and New York, in which courts declined to follow Galaviz and elected to
enforce Delaware exclusive forum selection bylaws.
Distinguishing Chancellor Strine’s opinion, the TriQuint court characterized the Chevron
opinion as a “narrow holding,” and instead relied heavily on the 1971 Delaware Supreme Court
decision in Schnell v. Chris-Craft Industries, Inc. There, the court rejected an attempt by the
Chris-Craft board to respond to a proxy contest by amending its bylaws to accelerate the date of
the corporation’s annual meeting and move the meeting to a remote town, which the court held
was a deliberate attempt to obstruct legitimate stockholder rights. The TriQuint court held that,
because the TriQuint board had adopted the forum selection bylaw at the same meeting in which
it approved the merger, it had attempted to insulate itself from litigation and had foreclosed any
stockholder attempt to repeal the new bylaw. The Oregon court did not address the fact that the
TriQuint forum selection bylaw did not preclude stockholder litigation relating to the merger
(indeed, identical stockholder litigation was filed in Delaware).
Ultimately, the TriQuint court acknowledged that exclusive forum selection bylaws can be
enforceable, but only if they are adopted prior to the alleged wrongdoing and “with ample time
for the shareholders to accept or reject” the bylaw. In focusing on those criteria, the court placed
particular emphasis on whether the shareholders would be “forced to accept” the bylaw—an
analysis not emphasized by more recent rulings from other courts evaluating the enforceability of
a Delaware exclusive forum selection bylaw. While the TriQuint ruling counsels in favor of
enacting a forum selection bylaw “on a clear day”, it should be noted that the opinion deviates
from the weight of current precedent on this issue by imposing this additional requirement.
Roberts v. TriQuint Semiconductor, Inc., Case No. 1402-02441 (Oregon Cir. Ct., Aug. 14, 2014).
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Chancery Court Highlights Need for Clarity in
Priority of Sources of Advancement and Indemnification
The Delaware Court of Chancery’s recent decision in Pontone v. Milso Industries Corp., C.A.
No. 8842-VCP (Del. Ch. Aug. 22, 2014), is the latest in a line of cases considering advancement
and indemnification rights. This case in particular highlights how crucial the wording of
advancement and indemnification provisions can be to a director’s ability to pursue his or her
rights in the midst of litigation. The decision also highlights the need for directors, companies,
and sponsors to consider carefully the contractual terms that govern alternative sources of
indemnification.
The Pontone case falls in a line of cases that began with Levy v. HLI Operating Co.,1 in which
the Delaware Court of Chancery held that an indemnified director who had been fully
reimbursed for litigation and settlement expenses by one indemnitor lacked standing to pursue
indemnification from another indemnitor, because the director could not show financial loss. In
that case, the director was the designee of the company’s private equity sponsor, and the private
equity fund’s limited partnership agreement provided for mandatory advancement and
indemnification. The fund had paid his expenses after the portfolio company refused. Soon after
Levy was decided, in Schoon v. Troy Corp.,2 the Court declined to extend Levy’s reasoning to
circumstances where a shareholder voluntarily undertakes to advance defense expenses for the
benefit of its board designee, where the designee was obligated to repay such amounts to the
shareholder. The Schoon Court held that a party receiving voluntary advancement from one
source had standing to pursue mandatory advancement from another source.
In Pontone v. Milso Industries Corp., the court considered whether, under both 8 Del. C. ¶ 145
and the applicable agreements among the parties, a former officer and director of two Delaware
companies had standing to assert a claim for advancement for legal fees and expenses he
incurred in litigation against those companies, where the director also had another source of
potential advancement, and had already received advancement from that source for fees incurred.
Vice Chancellor Parsons held that (1) a director has standing to assert a claim for advancement
as to expenses, both incurred but unpaid and not yet incurred, for which he has not yet received
advancement from another source that is obligated to advance; (2) a director does not have
standing to assert an advancement claim against the companies as to expenses for which the
director has already received payment of advancement from the other source (but that other
source may be able to pursue contribution from its co-indemnitors, the companies); and (3) a
director may obtain a prorated portion of “fees on fees,” as well as prejudgment interest, for his
attempts to prosecute an advancement claim, notwithstanding the fact that he has not been 100
percent successful in prosecuting his claims.
1 924 A.2d 210, 214 (Del. Ch. 2007).
2 948 A.2d 1157, 1159 (Del. Ch. 2008).
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The court reasoned that the fact that plaintiff had requested and received advancement from
another source in the past did not preclude or undermine plaintiff’s independent contractual right
to advancement under the bylaws of York and New Milso. In addition, the Court noted that
York and New Milso could have contracted around this issue by stating in their bylaws that they
would provide advancement only to the extent that covered individuals are unable to obtain
advancement from other sources, but did not do so.
The Pontone case highlights the need for indemnitors and indemnitees to be mindful of the
importance of addressing at the outset any issues relating to multiple sources for advancement or
indemnification. In particular, indemnitors cannot use Levy’s standing requirements to shirk
advancement liability for incurred but unpaid and for future expenses that are subject to
advancement. That is, there is no incentive to dodge advancement obligations in the hope that
they can be avoided when another party meets its obligation. Recalcitrant parties who owe
advancement also risk “fees on fees” awards.
As for indemnitees, Pontone stresses the importance of bringing contribution actions early,
thereby reducing the amount at issue in any contribution action. It is also important to attempt to
contract around potential advancement and indemnification problems, e.g., a loan forgiveness
provision that only provides for partial release, to the extent of the lending party’s co-indemnity
obligation.
Pontone v. Milso Industries Corp., C.A. No. 8842-VCP (Del. Ch. Aug. 22, 2014).
Rural Metro Damages Decision Results in Significant Liability for Financial Advisor
The Ropes Recap for the First Quarter of 2014 reported on the Delaware Court of Chancery’s
March 7 post-trial liability opinion in In Re Rural Metro Corporation Stockholders Litigation. In
that decision, Vice Chancellor Travis Laster held Rural/Metro’s financial advisor, RBC, liable
for aiding and abetting the Rural/Metro board of directors’ breach of its fiduciary duties in
connection with the acquisition of Rural/Metro by Warburg Pincus. The Vice Chancellor found
that, among other things, RBC advised the board not to expand and extend the sales process in
ways that would likely have generated greater bids and provided a tardy and insufficiently robust
valuation analysis that was engineered to justify the deal price. He also rejected RBC’s
argument that a general conflict waiver in its engagement letter was sufficient to preclude aiding-
and-abetting claims, because RBC failed to disclose specific conflicts related to the deal, in
particular its goal of providing “stapled financing” to the ultimate acquirer.
On October 10, the Vice Chancellor Laster issued his opinion on damages, holding RBC liable
for 83% of the damages suffered by the class, or $75.8 million dollars. The damages decision
serves as a reminder that aiding and abetting a breach of fiduciary duty remains a viable claim
Delaware, highlighting the importance of a well-run sales process. The decision also
demonstrates the Delaware Court of Chancery’s continued willingness to hold financial advisors
liable in situations where such advisors succumb to conflicts created by “stapled financing,”
particularly where there is no specific disclosure of such conflicts either in an engagement letter
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or elsewhere. In addition, the decision shows how exculpation clauses for breaches by directors
of the duty of care (as permitted by Section 102(b)(7) of the Delaware General Corporation Law),
can serve to shift liability to non-settling defendants, and force them to take awkward positions
against their clients at trial.
The liability-shifting effect of the Rural/Metro damages decision is grounded on its treatment of
an issue of first impression in Delaware: the allocation of liability between corporate fiduciaries
and their advisors under Delaware’s Uniform Contribution Among Tortfeasors Act
(“DUCATA”), 10 Del C. § 6301, et seq. In aiding and abetting claims, all tortfeasors are jointly
and severally liable, though a plaintiff may recover from any one of the tortfeasors. The court
therefore had to decide whether RBC, as the only party that did not settle pre-trial, would be
entitled to claim “credit” for the consideration paid by the settling parties. Vice Chancellor
Laster concluded that, because DUCATA does not bar contribution for intentional torts, RBC
could attempt to claim credit under DUCATA.
To receive “settlement credit,” RBC had the burden of establishing that the settling defendants
were joint tortfeasors—that is, that they were liable as well. The Court noted that the settlements
did not include admissions of liability, and that RBC had the opportunity to develop a record to
support its contribution claims at trial (by presenting evidence of wrongdoing by the directors,
rather than by RBC). But RBS opted not to do so, instead presenting a “united front” defense.
Thus, to determine whether directors were liable as joint tortfeasors, the Court looked to whether
the director defendants would have been entitled to exculpation under Section 102(b)(7). If so,
then RBC could not obtain contribution from them, and therefore could not claim “settlement
credit.” RBC had the burden of proving that exculpation was not available because the factual
basis for the underlying claims did not solely implicate violations of the duty of care. The court
concluded that two of the directors were not entitled to exculpation, including the director who
led the Special Committee in hiring RBC as the Company’s banker. Those two directors were
allocated 17% of total liability.
To assess damages against RBC, the Court conducted a quasi-appraisal and concluded the Class
suffered damages of $4.17 per share, or $91.32 million in aggregate. That amount was offset by
the 17% attributable to the directors who settled but who were not entitled to exculpation,
leaving RBC responsible for $75.8 million in damages. This “liability-shifting” from exculpated
directors to RBC suggest that RBC might have kept its liability lower by pointing fingers at the
settling directors, rather than by maintaining a “united front” defense. This obviously would
have put RBC in the awkward position of, in effect, blaming its client to protect itself.
In re Rural/Metro Stockholders Litigation, C.A. No. 6350‒VCL (Del. Ch. Oct. 10, 2014)
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Federal Update
New Bill Aims to Expand CFIUS Review Process
An outspoken critic of last year’s acquisition of Smithfield Foods, Inc., by China’s Shuanghui
International, Congresswoman Rosa L. DeLauro (D-CT) recently introduced a bill that, if passed,
would substantially expand both the substance and the scope of the Committee on Foreign
Investment in the United States (CFIUS) review process. CFIUS presently reviews the national
security implications of acquisitions of certain U.S. business by foreign parties.
Introduced on September 18, 2014, the bill, known as the “Foreign Investment and Economic
Security Act of 2014” (HR 5581) (“FIESA”), would require CFIUS to determine not simply
whether a covered transaction is a threat to national security interests, but whether the transaction
would present a “net benefit” to the U.S. FIESA prescribes the following factors for making this
“net benefit” determination:
(A) The effect on U.S. economic activity (e.g., quality of employment, utilization of
parts/services produced in the U.S., exports from the U.S.);
(B) The effect on U.S. technology, productivity, and innovation;
(C) The effect on competition within the relevant U.S. industry;
(D) The transaction’s compatibility with national industrial/economic/cultural policies; and
(E) The transaction’s effect on public health and safety.
In the case of a foreign government or state-owned entity acquiring a U.S. company, FIESA
proposes adding additional factors aimed at testing the “commercial orientation” of the foreign
acquirer as well as the foreign acquirer’s stated governance policies and extent of its adherence
to U.S. standards of economic and accounting transparency.
In a statement made after introducing the bill, Congresswoman DeLauro stated that her CFIUS
amendment is “necessary to ensuring American workers are not sacrificed for foreign profits,”
and DeLauro would accordingly elevate the Secretary of Labor to the ranks of CFIUS members
with a vote on the net benefit determination, joining the Attorney General, the U.S. Trade
Representative, Secretary of Commerce, and the Secretary of the Treasury. (The Secretary of
Labor currently is a non-voting member of CFIUS.) Also receiving a vote would be the
Department of Agriculture for transactions that may affect the agricultural sector and the
Department of Health and Human Services for transactions that may affect the public health.
FIESA would also expand the types of transactions subject to CFIUS review. Not only would
CFIUS be charged with reviewing mergers, acquisitions or takeovers by a foreign person that
result in control of covered U.S. businesses, but also “any construction of a new facility in the
United States by a foreign person.”
-14-
While it is unlikely Congress will take any action on the bill this year, it proposes one potential
avenue for revamping CFIUS in light of criticisms spotlighted last year during the course of the
Smithfield transaction.
Cornerstone Report on Securities Litigation in H1 2014:
Report Shows Decline in Securities Class Action Litigation
In August 2014, Cornerstone Research issued its mid-year assessment of securities class action
filings. Cornerstone reported that plaintiffs filed 78 securities cases in the first six months of
2014–fewer than the 91 that were filed in the second half of 2013, and nearly 20% below the
historical semiannual average since 1997.
Analysis of securities filings’ impact on market capitalization showed an even more pronounced
decline. Cornerstone’s disclosure dollar loss metric, which measures the change in value of a
defendant firm’s market capitalization between the trading days immediately preceding and
immediately following the end of the class period, totaled $30 billion for cases filed during the
first half of 2014, less than half of the historical average since 1997 ($62 billion). Similarly, for
cases filed during the first half of 2014, the decline from defendant firms’ highest market
capitalizations during the class period to their valuation on the day immediately following the
class period (the maximum dollar loss) totaled $93 billion. This is materially less than the
average of $315 billion per six-month period from 1997 through 2013. One of the drivers of the
decline in dollar losses associated with the securities filings during H1 2014 was the fact that
there were no “mega claims” filed during the period (i.e., filings with an alleged loss of at least
$5 billion or a decline in market capitalization of at least $10 billion from the class period peak
to the day immediately following the class period).
Despite this decline in mega securities litigations filings, Cornerstone found that the likelihood
that a public company will be the subject of a filing has remained near historical averages;
approximately one in 60 companies listed on the major U.S. exchanges was the subject of a class
action during the first half of the year. Additionally, securities cases continue to be filed shortly
after the end of the class period/issuance of the alleged corrective disclosure, with an average lag
of 12 days, and companies in the healthcare, biotechnology, and pharmaceutical industries were
the most frequent targets for shareholder class actions.
New Regulations Likely to Slow “Inversion” Deal Activity
Over the past several years, the frequency and notoriety of so-called “inversion” transactions has
increased dramatically. An inversion typically involves a U.S. company merging with an
overseas company, with the U.S. company becoming a wholly-owned subsidiary of the non-U.S.
parent. Many companies have used the “inversion” structure over the past few years, with
notable deals including Argonaut-PXRE (reincorporating in Bermuda), Alkermes-Elan Drug
(reincorporating in Ireland), and Liberty Global-Virgin Media (reincorporating in the United
Kingdom).
-15-
The proliferation of this structure reflects an oddity of U.S. tax law: unlike most developed
nations’ corporate tax systems, U.S. taxes on corporate profits are not limited to U.S.-based
earnings, but also include earnings abroad that are repatriated. This not only makes effective
corporate rates much higher for U.S.-based companies, but also prevents many U.S.-based
companies from bringing foreign earnings into the U.S., thereby reducing the potential for
investment and shareholder returns. As a result, U.S. companies that reincorporate abroad often
choose to do so in a country with a corporate tax rate that is lower than the U.S. rate, one with a
territorial tax system (i.e., one that does not tax income from a foreign source), and one that has
entered into an income tax treaty with the United States. The economic advantage is undeniable:
reincorporating in Bermuda generally yields a corporate tax of 0%, in Ireland approximately
12.5%, and in the United Kingdom approximately 21%. These rates represent a significant
reduction from the 35% marginal federal corporate tax rate many companies face in the United
States.
Although such deals are designed specifically to conform to U.S. tax laws and regulations,
“inversions” have come under increasing attack by politicians and the press, who typically deride
the deals as “unpatriotic” attempts to shirk taxes. After months of rhetorical attack on inversions
by the Obama administration, the Department of the Treasury and the Internal Revenue Service
issued a notice of new regulations on September 22, 2014, “to reduce the tax benefits of—and
when possible, stop—corporate tax inversions.” Critics have noted that these rules were issued
within months of statements by administration officials that, absent additional legislation, they
lacked the power to limit inversions by regulation. Regardless, the rules have led to the
termination of at least one deal, the $54 billion merger of Shire and AbbVie.
The new Treasury and IRS rules are designed to limit key advantages of inversions in four
specific ways: prevention of “hopscotch” loans; tightened restrictions on inverted companies’
tax-free access to a foreign subsidiary’s earnings; disallowance of tax-free cash and property
transfer between a foreign subsidiary and its new parent; and stronger requirements that the
former owners of the inverted company own less than 80% of the new combined entity.
• “Hopscotch” loans allow inverted companies tax efficient access to a foreign subsidiary’s
earnings (i.e., the cash trapped offshore). However, the new regulations prevent this tax
treatment by considering loans of inverted companies as dividends that are taxable in the
United States. The new tax treatment is the same as if the foreign subsidiary had made a
loan to the inverted company before the inversion took place.
• Previously, inverted companies could restructure a foreign subsidiary in a way that
allowed the inverted company tax-free access to the subsidiary’s earnings. However, the
new regulations restrict post-inversion transfers of a U.S. target’s controlled foreign
corporation shares as well as those corporation’s assets. This rule change will make it
more difficult to access overseas cash tax-free.
-16-
• Treasury notes that the new regulations will expand the reach of current IRS rules to
prevent inverted companies from transferring cash or property tax-free from a controlled
foreign corporation to the new parent. This change means inverted companies will no
longer be able to repatriate cash or property tax-free by bypassing the U.S. inverted
company.
• The new rules also tighten the restriction that the former owners of the inverted company
own less than 80% of the new combined entity, making it more difficult for a U.S.
company to invert. Passive assets, including cash or marketable securities, that were not
part of the foreign entity’s daily business functions previously counted towards this 80%;
however, the new regulations disregard much of these assets from the calculation. The
new rules also prevent U.S. companies from reducing their pre-inversion size by making
extraordinary dividends to meet the 80% threshold.
Notably, the new regulations did not address transfer pricing or earnings stripping, other
practices which can reduce the amount of taxes owed by U.S. companies.
The new regulations will likely draw a challenge in the courts. But until their fate is decided, we
expect the new regulations to reverse the upward trend in corporate inversions in recent years.
-17-
Notable Deals
Dollar General Rebuffed (Again), But the Fight Goes On
Dollar General Corporation has now been rejected twice in its takeover bid for rival Family
Dollar Stores, Inc. This saga began in June 2014 when Dollar General and Family Dollar
discussed a possible deal. By the end of July, however, the tide had turned, and Dollar Tree, Inc.,
stepped in, agreeing to buy Family Dollar for approximately $8.5 billion in a combined cash-
and-stock deal. Dollar General, spurred on by the competition, offered to buy Family Dollar for
approximately $9 billion in an all-cash deal.
Realizing the merger could face antitrust complications from federal regulators, along with its
bid, Dollar General offered to divest up to 700 of its stores if needed. On August 21, 2014, just
three days after Dollar General’s first bid, the Family Dollar board of directors unanimously
rejected Dollar General’s unsolicited offer, specifically citing antitrust concerns. On September
2, 2014, Dollar General increased its bid to approximately $9.1 billion and offered to divest up to
1,500 stores if antitrust difficulties required it to do so. With this second offer, Dollar General
also included a $500 million reverse termination fee if the deal is stymied by regulators. Family
Dollar’s board of directors also rejected Dollar General’s second bid. Twice-spurned, Dollar
General then took its offer directly to stockholders, commencing a hostile tender offer for Family
Dollar’s outstanding stock on September 10, 2014. The tender offer was set to expire on October
10, 2014, but was extended to October 31.
The Family Dollar board of directors has advised stockholders not to tender their shares, and
interestingly, large Family Dollar stockholder and activist hedge fund Trian Partners has
followed the board’s recommendation in refusing to tender, even though Dollar General is
offering a higher price than Dollar Tree. Family Dollar, continuing to stand firm in its rejection
of the Dollar General offer, declared in a joint press release with Dollar Tree that it expects a
deal with Dollar Tree to close as early as November 2014.
-18-
London Update
The Small Business, Enterprise and Employment Bill Would Increase the Ability to
Identify Those Who Own and Control UK-Registered Companies
The Small Business, Enterprise and Employment Bill, which would amend the Companies Act
2006, was recently introduced into the UK Parliament. The Bill proposes a number of company
law reforms that are intended to make it easier to establish the identity of the individuals who
own and control companies that are registered in the United Kingdom. If enacted, these changes
would represent a paradigm shift for private and unlisted public companies. Persons holding or
interested in purchasing significant control in a UK-registered company will need to be aware
that such ownership will be a matter of public record, if the Bill is enacted.
The proposed reforms implement a number of the commitments that the UK Government made
as part of the G8 summit in June 2013, that are designed to promote trust in the way in which
companies are run and business is conducted in the United Kingdom. The aim is to limit the
scope for companies to be used for illicit activities and for those who own and run them to avoid
detection. The Government presently intends to bring the legislation into force before the end of
its current term, but the Bill still has a number of hurdles to pass before it becomes law, and may
be modified during this process.
The centerpiece of the company law reforms proposed by the Bill is the requirement for all
companies to maintain a register of individuals who have “significant control” over the company,
which will be available for the public to review. Under the proposed new regime, all companies
that are registered in the United Kingdom (other than those that are already subject to public
disclosure regimes) would be required to maintain a new statutory register (the “PCS Register”)
of individuals who have ‘significant control’ over the company. This goes far beyond the current
statutory requirement for all companies to maintain a statutory register of their registered
members.
In broad terms, the test for “significant control,” as currently proposed, looks to (i) ownership or
control of 25% of the shares and/or voting rights of the company; (ii) the right to appoint and
remove a majority of the board; and/or (iii) other circumstances where an individual has the right
to exercise or actually exercises ‘significant influence or control’ over the company. These
provisions will operate on a look-through basis, and will capture indirect interests. Companies
will be obliged to take the necessary steps to gather the requisite information about these
individuals in order to populate its PSC Register. Those individuals who have significant control
will be under a complementary obligation to disclose their status to the company. Sanctions will
apply to companies, their directors and relevant individuals who fail to comply with their
obligations.
The primary administrative burden of identifying individuals who have significant control will
fall squarely on the company. Companies will be given the requisite tools to require any person
-19-
whom the company believes to have an interest in shares to declare such an interest. However, it
is not yet clear how far companies (and their directors) will be expected to go in terms of
carrying out any broader, more forensic review into the beneficial ownership of the company’s
shares in order to discharge their new statutory duty.
Conversely, individuals who acquire significant control of a company registered in the United
Kingdom will need to understand that their interest in the company in question will be a matter
of public record. In order to ensure that they comply with the regime, investors will first need to
identify whether their interest in a company constitutes “significant control.” If so, investors will
then need to ensure that they have taken the necessary steps to disclose this interest to the
company, which might involve responding to information requests from the company or
proactively disclosing their interest, if the company has failed to identify it.
Certain commentators have questioned whether the objective of greater transparency could be
achieved by maintaining the register privately. This would provide law enforcement authorities
with the necessary information to act expediently against those who misuse companies for illicit
purposes, but would not compromise the anonymity of individuals who wish to keep their
business activities confidential. This said, these reforms are part of a broader trend towards
greater transparency in the United Kingdom, following such recent examples as the Alternative
Investment Fund Managers Directive and the Financial Services Act 2012. In any event, it is
difficult at this stage to predict what real impact the proposed change would have in practice
above and beyond the administrative practicalities mentioned above. It also remains to be seen
whether the Bill will encounter any resistance in Parliament.
-20-
Asia Update
Administrative Controls Relaxed for Outbound Investments by Chinese Enterprises
On September 6, 2014, the Ministry of Commerce of the People’s Republic of China
(“MOFCOM”) issued a revised version of the Administrative Measures for Outbound
Investment, which took effect as of October 6, 2014 (MOFCOM Order 2014 No. 3) (“New
Measures”), amending the Administrative Measures for Outbound Investment issued by
MOFCOM in 2009 (MOFCOM Order 2009 No. 5) (“Old Measures”). The New Measures aim
to facilitate Chinese enterprises’ outbound investments, furthering the Chinese government’s
efforts to reduce administrative approval through simplified procedures.
The New Measures repeal the requirement under the Old Measures that enterprises obtain
approval of MOFCOM or its provincial counterparts before their outbound investment
agreements become effective. A new administrative system of “filing in principle and approval
as a supplement” is established under the New Measures to replace the approval regime under
the Old Measures. Only outbound investments involving “sensitive” countries or regions and
sensitive industries (as set forth in the New Measures) require approval. Such “sensitive”
countries or regions include those that have not established diplomatic relationships with the
People’s Republic of China or are under United Nations’ sanctions. Outbound investments in
financial institutions are governed separately and not covered by the New Measures.
Under the New Measures, the application materials required for filing or approval are simplified
and the time limits for MOFCOM’s decision-making on applications are shortened. For example,
for outbound investments subject to filing, the applying enterprise may successfully complete a
filing in three business days after submitting a filing form and a photocopy of its business license.
Prohibitions on certain outbound investments remain in the New Measures, including
investments regarded as (i) “endangering” the state sovereignty, national security and the public
interests of China or violating any Chinese law or regulation, (ii) damaging to the relationship
between China and the relevant country/region, (iii) violating any international treaty to which
China is a party, or (iv) involving any technology or goods that are prohibited from export.
-21-
Contributors
Partners:
Lee Allison (New York)
lee.allison@ropesgray.com
Jay Freedman (San Francisco)
jason.freedman@ropesgray.com
Richard Gallagher (San Francisco)
richard.gallagher@ropesgray.com
Howard Glazer (San Francisco)
howard.glazer@ropesgray.com
Jane Goldstein (Boston) (co-head of M&A)
jane.goldstein@ropesgray.com
James Lidbury (Hong Kong) (co-head of M&A)
james.lidbury@ropesgray.com
Carl Marcellino (New York)
carl.marcellino@ropesgray.com
Bill Mone (London)
bill.Mone@ropesgray.com
Peter Welsh (Boston)
peter.welsh@ropesgray.com
Marko Zatylny (Boston)
marko.zatylny@ropesgray.com
Counsel:
Martin Crisp (New York)
martin.crisp@ropesgray.com
Professional Support Lawyer:
Fay Anthony (London)
fay.anthony@ropesgray.com
Chief of Legal Knowledge Management:
Patrick Diaz (Boston)
patrick.diaz@ropesgray.com
Associates:
Allison Ambrose (Boston)
Allison.Ambrose@ropesgray.com
Zachary Blume (Boston)
zachary.blume@ropesgray.com
C. Thomas Brown (Boston)
thomas.brown@ropesgray.com
Richard Conklin (Boston)
richard.conklin@ropesgray.com
James Davis (Chicago)
james.davis@ropesgray.com
Tara Fisher (Boston)
tara.fisher@ropesgray.com
Elizabeth Johnston (Boston)
elizabeth.johnston@ropesgray.com
Jeffrey Koh (Chicago)
jeffrey.koh@ropesgray.com
Emily Nagle (Chicago)
emily.nagle@ropesgray.com
Lisa Rachlin (Boston)
lisa.rachlin@ropesgray.com
Jaclyn Ruch (New York)
jaclyn.ruch@ropesgray.com
Michael Shiposh (Boston)
michael.shiposh@ropesgray.com
Justin Voeks (Chicago)
justin.voeks@ropesgray.com
Christian Westra (Boston)
christian.westra@ropesgray.com
Peng Yu (Hong Kong)
peng.yu@ropesgray.com

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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"Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).

"Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.

"Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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